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Since the last investment issue of ombudsman news, the
PIA issued Regulatory Update 94 (RU94), dealing with the outcome
of the Needler Financial Services v Taber case. Details
are on the FSA
website. The regulator proposes to consult on its draft
guidance on the treatment of windfall benefits, with a view
to issuing formal guidance. Although that guidance is unlikely
to come into force before May 2002, RU94 provides the basis
for moving forward. We stated in the August issue of ombudsman
news that we would be reviewing matters after 17 September,
and we are now able to confirm our current position.
windfalls in pensions and FSAVC
(Free-Standing Additional Voluntary Contributions) review cases
The
PIA Ombudsman Bureau’s terms of reference required it to
follow the PIA’s standards for the review of pension transactions.
Regulatory Update 89 (RU89) allowed firms dealing with cases
where the investor had received a windfall in cash or shares
to suspend progress, if they wished, at the point where the
windfall became a relevant issues (for the calculating of loss).
Any of these suspended cases will now be decided in accordance
with RU94. Exceptionally, for cases where the policy has been
enhanced by a windfall benefit, we will wait until the publication
of the revised regulatory guidance before making a final decision.
As RU94 follows our understanding of the Court’s view,
all investment division cases are now worked on this basis.
windfalls in mortgage endowment complaints
There
is no regulatory guidance for the handling of these complaints
and we reach decisions based on the facts and circumstances
of each individual case. Where these cases involve windfalls,
the High Court decision in the Taber case now provides additional
judicial guidance on the relevant principles when we calculate
compensation.
This
judgment makes clear that:
-
any benefits received from a demutualisation were not received
as a result of the firm’s negligence; (in the Taber case,
benefits were taken in the form of shares, but referred to
in the judgment as potentially being taken in the form of
cash or additional bonuses);
and
therefore
- the
value of the benefits received does not need to be taken into
account to reduce the amount of any compensation payable to
a policyholder.
We will continue to look at the particular facts and circumstances
of each individual case. Where customers received a windfall
benefit, in whatever form, we will generally disregard the value
of this benefit when we decide the amount of compensation they
should receive.
RU94
prohibits firms from making offers of compensation that deduct
the value of any windfall benefits, in whatever form these benefits
are received – whether as shares, cash, additional bonuses
or other enhancements to the policy.
Case
law has determined the appropriate treatment for complaints
of this type, so in the absence of any regulatory guidance,
we will continue to make our decisions in accordance with the
law, taking into account the particular facts and circumstances
of each case.
The
Taber judgment did not specifically refer to windfall benefits
received, in whole or in part, in the form of policy enhancements.
We will not issue final decisions on cases involving this type
of windfall benefit until after the regulator has published
its guidance. This will only affect a small number of cases.
RU94
does not prohibit firms from making offers that exclude all
benefits, and we would not seek to disturb offers made to policyholders
on this basis. However, we will defer making a final decision
in any of these cases where the firm and the policyholder cannot
reach agreement on the suitability of an offer.
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case
studies – windfalls
These
cases illustrate the response of firms to windfalls,
the Taber case and the publication of Regulatory Update
94.
11/01
Mr and Mrs B complained that their adviser never told
them their mortgage endowment policy might not produce
enough to pay off their mortgage. We issued a provisional
decision upholding the complaint and suggesting the
firm should calculate compensation in accordance with
RU89. This showed that the couple had made a loss of
£262.03.
Mr and Mrs B had received windfall benefits and the
firm wanted to deduct them from the compensation. If
it had done so, this would have cancelled out Mr and
Mrs B’s loss. However, following the result of
the Taber court case, the firm accepted that it should
pay the full amount of compensation.
.............................................................
11/02
In January 2001, Mr and Mrs A discovered that their
mortgage endowment policy was likely to produce £6,650
less than they needed to pay off their mortgage. They
complained that the firm had mis-sold the policy. It
had not discussed any alternative types of mortgage
with them, and disregarded the fact that they did not
want to take any risk.
The firm was unable to produce much documentation from
the time of the sale. However, the information we obtained
from Mr and Mrs A by means of the mortgage endowment
questionnaire indicated they were cautious investors,
for whom an endowment policy was unsuitable.
We upheld the complaint and awarded compensation calculated
in accordance with RU89, plus £200 for distress
and inconvenience. The couple then converted their mortgage
to a repayment-only basis.
It was important to ensure that rectifying the mortgage
endowment mis-selling did not result in the couple being
penalised for the deterioration in health they had both
suffered. Mrs A’s health had already been poor
at the time they took out the endowment mortgage policy;
her husband was subsequently diagnosed with a serious
illness. Taking out a life assurance policy to cover
the repayment mortgage would now be very expensive for
them. We therefore decided that the firm should compensate
them for this. We awarded a sum representing the difference
between the cost of a decreasing term assurance policy
now, compared to its cost when they first took out the
mortgage.
Mr and Mrs A had received demutualisation benefits from
the product provider that supplied their endowment policy.
The firm wanted to deduct the value of these benefits
from the amount of compensation it paid. However, in
view of the outcome of the Taber case, we ruled that
it could not do this.
.............................................................
11/03
Mr and Mrs D complained when they discovered that their
mortgage endowment policy was not guaranteed to repay
their mortgage and did not mature until Mr D was 67.
The firm accepted our view that it should carry out
calculations, in accordance with RU89, to establish
whether the couple had suffered a loss as a result of
having the mortgage endowment policy rather than a repayment
mortgage taken out over 18 years (to end at Mr D’s
normal retirement age).
The firm did not accept that it should not deduct from
any compensation
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the value of windfall shares the couple received from the policy provider’s demutualisation; and |
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the notional ‘savings’ the couple made as a result of paying less, to date, under the existing endowment arrangements than they would have paid for an 18-year repayment mortgage. |
Eventually, after further correspondence with us and
after the appeal period in the Taber case had expired,
the firm agreed not to make any deduction for the notional ‘savings’. But it said that ‘as a gesture
of goodwill’ it would deduct only 50% of the current
value of the couple’s windfall shares.
The comments of one of the High Court judges in the
Needler Financial Services v Taber case were relevant
here. He said that windfall shares should not be taken
into account if they were received as a result of the
decision to demutualise, rather than as a consequence
of advice from the person who sold the policy that gave
rise to the entitlement to the ‘windfall’
benefit. We therefore ordered the firm not to deduct the value
of the windfall shares from the compensation.
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